NY futures continued to pull back this week, as May dropped 138 points to close at 82.15 cents.

The market remained range-bound this week, as scale down fixation buying continued to provide support, while uncertainty on the global trade front kept speculators on the defensive. The May contract has now settled the last 20 sessions in a relatively narrow range of 389 points, between 81.23 and 85.23 cents.

Interestingly, when we look at the combined open interest in May and July, there has been very little change during this period, as May dropped 10,305 contracts, while July open interest increased by 7,573 contracts since February 23. Although mills may have fixed some of their existing commitments, they seemed to replace them just as fast with new ones during this period of strong export sales. Combined open interest in May and July still amounted to 18.37 million bales, of which around a third is tied to unfixed on-call sales.

Today’s on-call report showed that unfixed on-call sales went in the wrong direction last week, as they increased to over eight million bales for May and July combined. While May on-call sales dropped by 0.15 million to 3.05 million bales, July saw an increase of 0.22 million to 4.96 million bales. Overall on-call sales reached a new record last week, with 16.06 million bales yet to be priced.

The on-call position in current crop is similar to that of a year ago, when 3.33 million bales were open on May and 4.36 million on July. Last season prices spiked to a high of 87.18 cents by mid-May on short covering, before the market finally sold off going into the July notice period. Whether history will repeat itself remains to be seen and depends to a large degree on what spec longs are going to do with their 9.4 million bales net long position.

The big news story this week was the Trump administration’s announcement of trade sanctions on about USD 60 billion worth of Chinese imports. Tariffs won’t be levied immediately, as the US trade representative will publish a list of targeted items within the next 15 days, followed by a 30-day public comment period.

However, this marks the opening shot of what is likely going to escalate into a trade war, which could turn the global economy on its head. The Dow Jones index lost today over 700 points or about 3% of its value in reaction to these trade sanctions. Meanwhile the 10-year Treasury bond saw the biggest drop in yield in over six months, as traders are becoming fearful of an economic slowdown.

Traders will mull over the potential implications of these sanctions over the coming days and weeks, but this can’t possibly be spun in any positive way . It will take a while to fully comprehend what a trade war would mean in terms of its economic, financial and geo-political impact, but we feel that the immediate reaction by investors and traders will be to play it safe. We would therefore not be surprised to see speculators adopt a “risk off” attitude going forward, which for our market would mean a reduction of the spec net long position.

So where do we go from here? It’s a tough call at the moment, since there are several factors that have the ability to move the market, be it trade sanctions, the large unfixed on-call position, drought conditions in West Texas, lower acreage in India or a chart that is sending weak signals.

What we know for sure is that mills will have to fix around 8 million bales in less than three months. The question is whether speculators will provide the necessary liquidity for this to happen without the shorts getting squeezed? Until last week we felt that sell-side liquidity would be a problem, but with a trade war looming, specs might start to reduce their commodity exposure. We still have to wait and see how markets are going to react over the coming days, but mills may finally get a chance to buy their way out of trouble!

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